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      What is a Fixed Rate Mortgage?

      What is a Fixed Rate Mortgage?

      With a Fixed Rate Mortgage the interest rate of the mortgage does not change for the duration of the term.  Simple right!  But what exactly is a mortgage, what is meant by interest rate and what is the term?

      As always, one answer raised three questions.  Read on!

      What is a Mortgage?

      A mortgage is a loan that is secured by property.   Imagine your little brother borrowed $10 from you and promised to pay it back.  That’s a loan.   Now imagine that same scenario but you take his favorite hat as collateral (or security, hence the term secured by).  Now you basically have a mortgage.  With residential mortgages the home and the lot that it sits on is the security/collateral.  If you do not pay the mortgage, the lender has the ability to foreclose (or repossess) the property.  They have security for the funds they have lent out.

      What is Interest Rate?

      Interest rate is the amount of interest due per period, as a proportion of the amount borrowed.  Lets stick with the same example as above. Your little brother borrows $10 at 10% interest per month, after 1 month he will owe you $11.  The original $10 plus $1 because 10% of $10 is $1.  With mortgages the interest rate is always per year, except you make payments at much quicker intervals, usually monthly or bi-weekly.  Let’s say you get a mortgage rate of 5% and you borrow $300,000, 5% of $300,000 is $15,000.  $15,000 divided by 12 is $1250, so every month you can expect to pay $1250 in interest alone, plus some principle.

      What is term?

      Term is the amount of time that the details of your mortgage last. Do NOT confuse this with amortization, amortization is the amount of time it would take you to pay off the entire loan amount.  The term is simply the length of time that you agree to pay the agreed upon interest rate.  There are lots of other details that go with the mortgage that hold up for the length of the term such as prepayment penalties/privileges, and transfer clauses, the main thing is the interest rate though.

      Here is a real world example…..  You borrow $300,000 and you sign up for a 5 year term at 5% amortized over 25 years.  This means that you pay 5% interest on the money you have borrowed for 5 years.  At the conclusion of those 5 years, you’ll still owe $265,500.  You will now need to sign a new mortgage with new terms for the remaining balance of $265,500 or pay it all out if you’ve got the cash.

      The amortization is basically there to determine how quickly you want to pay down the principle.  Whether you selected a 10-year amortization or a 25 year amortization it does not change the amount of interest you pay initially.   Think of the term as the “terms of the contract”  You’re going to pay X amount of interest for X amount of time.

      So back to the original question.  What is a Fixed Rate Mortgage.

      With a Fixed Rate Mortgage the interest rate is fixed.  Meaning it DOES NOT MOVE for the duration of the term.  Remember, I said the THE TERM, not the amortization.  So if you take a 5 year fixed you know your payments will not move for 5 years, regardless of where interest rates and the economy go.  You are locked into to fixed (does not change) interest rate for the length of the term of your mortgage.

      If you want to read more about this type of stuff Investopedia has some great articles, here is a link https://www.investopedia.com/terms/i/interestrate.asp#toc-what-is-an-interest-rate

      and another https://www.investopedia.com/search?q=what+is+a+mortgage

      I also have written several blogs and mortgage and finance that are a little better to read than your standard financial mumbo jumbo, here is a link to those https://dennismcnish.ca/blog/

      That about covers it!  Thanks for your time, I hope you enjoyed the read!

       

      Dennis McNish

      Centum Mortgage Professional

       

      ****credit to https://canadianmortgagepro.com/fixed-rate/ for the image****